The Journal Report

Brazil's government within days is expected to announce a plan to kick-start the nation's stalled broadband deployment. While details of the plan have yet to be released, President Luiz Inácio Lula da Silva has said he wants high-speed service to reach all Brazilian towns—at affordable prices—as a way to modernize the economy and create the technological infrastructure that poorer parts of the country need to compete.

For now, fast Internet connections are concentrated in the densely populated southeast. According to a study by the Australia-based telecom research firm Paul Budde Communication Pty Ltd., about 82% of Brazil's broadband subscribers are in one-fourth of the country: a roughly 1,000-mile coastal strip in the south that includes Rio de Janeiro and São Paulo. But even in this region, most households still have dial-up service. Indeed, broadband's market penetration in the state of São Paulo is only 11%, Paul Budde estimates.

Slow and Expensive

The reason: Broadband connections in Brazil for the most part are still relatively slow, and prohibitively expensive for most consumers. In São Paulo, a 1-megabit-per-second DSL connection costs about $30 a month. (New Yorkers, by contrast, can get 10 times that speed for less than $30 month.) Far to the north, in Manaus, a city of 1.7 million deep in the Amazon forest, some residential broadband customers pay more than $250 a month for 1 Mbps, though actual speeds customers experience can be far less.

ENLARGE

No one expects most Brazilian homes to have broadband comparable to developed-world standards quickly. The country is characterized by pockets of dense population surrounded by vast expanses with little or no development. Internet service reaches Manaus, for example, by radio signals that are then carried from central transmitters to the customers via cable. Brazil's telecom companies and other installers of fiber-optic networks say they will soon have infrastructure in place with the potential to serve most of the country. But they also say the costs they have incurred by bridging large empty areas, plus the taxes charged by various public authorities, make it impossible for them to provide service at prices that are affordable to most consumers and that still bring a profit.

So, the government plan is likely to push for a compromise: more broadband availability at affordable prices, but at speeds at the lower end—less than 1 megabit-per-second. That's too slow for downloading movies, say, but it's fine for students accessing educational data, one of the government's main goals. The government has discussed lowering taxes and subsidizing service to poorer families to help reach its goals. It wants consumers to have speeds of at least 256 kilobytes-per-second for less than $10 a month, according to a person involved in the talks.

The lack of robust, affordable service is curbing the growth of many companies. In Manaus, Jornal do Commercio do Amazonas, a business newspaper with its own Web site, pays $1,400 a month for a 1 Mbps connection. And its servers—the computers it uses to support its Web site—are in São Paulo, about 1,600 miles to the southeast. "If they were here, nobody would be able to access our content," says Sócrates Bonfim Neto, chief executive of Empresa Jornal do Commércio, the publisher of the newspaper. Mr. Neto adds that faster service would allow the newspaper to put up a better site, among other benefits.

Still Waiting

Business customers even in the biggest cities need more bandwidth. Claudio Odri, chief executive and founder of CdClip, a local start-up in São Paulo that provides online training, conferences and other services to corporations, says more high-speed users "would bring new demand from big clients, and my company would sure benefit."

So would online shoppers, and the companies that serve them. Wal-Mart Stores Inc. would like to see millions more consumers get faster Internet access to increase its business in Brazil. "As broadband access grows, so does online shopping," says Carlos Fernandes, chief of e-commerce for Wal-Mart's Brazilian operations. He says additional bandwidth is needed for a more complex Wal-Mart Web site that will appeal to users across Brazil's income spectrum.

Companies that make equipment for broadband also would like to see a more robust Internet marketplace in Brazil. The local unit of Cisco Systems Inc., for one, hopes to sell more equipment to help operators and installers extend their reach.

"Brazil needs investment in the last mile," says Cisco Brazil's Managing Director Rodrigo Abreu, referring to the high-speed lines that feed directly into businesses and households.

Critics say telecom companies in Brazil have dragged their feet in extending broadband services to areas outside the prosperous and industrialized south because of the large investment required and potentially low returns. Some also say the companies fear that making high-speed Internet more available will cannibalize their phone services.

Taxes Hurt

The telecom companies, for their part, say they are following regulatory mandates to expand the network of fiber and wireless broadband Internet. The carriers say the high prices they charge are mainly due to taxes. Various levies add as much as 50% to the base price of Internet service, depending on the state, according to telecom sources. The retail tax charged to consumers takes the biggest bite.

Some steps are being taken to lower those taxes. Last year, the state of São Paulo dropped its 25% retail tax for all Internet services of at least 256 kilobits per second that charge less than $17 a month. Cable company Net Serviços, in which Mexico's Telmex Internacional SAB de CV is a major shareholder through Embratel Participações SA, began selling such a service last year, as did Telecomunicações de São Paulo, which is controlled by Spain's Telefónica SA. Neither carrier would say how many subscribers it has yet. But Fábio Bruggioni, the Brazilian telecom company's manager for home services, says he believes there will be strong demand.

Paulo Mattos, an executive for regulatory affairs at Oi, also known as Tele Norte Leste Participações SA, the main carrier in most of Brazil, says that the company is on track to have the needed broadband infrastructure in place to cover the whole country by the end of the year. But only by reducing taxes and getting the government to subsidize broadband service to consumers, he says, will it be possible to deliver service at prices that most Brazilians can afford.

A spokesman for Brazil's regulatory agency for telecommunications, Anatel, says the agency has no control currently over what the owners of the networks may charge to lease their bandwidth in order to deliver service to consumers. However, regulating such relationships is likely to be part of the government's plan for broadband expansion.

Government Role

Indeed, it's possible that the government may wind up with a bigger role in Brazil's communications industry in general as a result of President da Silva's plan. More than 12,000 miles of optic fiber that is in place but not yet active belongs to various state-owned companies. Some of the president's aides believe that, by using that infrastructure and by offering tax incentives, among other things, the government could instill more competition that would bring prices down.

Officials familiar with the government's discussions also say the plan may include a big role for state-owned Telecomunicações Brasileiras SA, the surviving portion of Brazil's former telecom monopoly that in 1998 was split up and sold to private investors. According to these officials, Telebrás has been discussed as the possible grantor of licenses for companies that want to install the last mile of cable and become service providers. Small operators from the private sector would bid for the licenses to offer residential services. Another possibility is a new state-owned concern would be created specifically for this role, according to these sources.

Government officials say the president wants competition and wants private companies that provide affordable broadband service. But he also wants any state-owned enterprises involved to operate in the black.

"We don't want to charge predatory prices," says a presidential aide who has taken part in the discussions.

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